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LeBron James Scoffs at These Taxes

11/13/2018

If you were coaching your kid’s basketball team, you wouldn’t win many games if you told them to aim for the backboard. Your opponents might love you, but there would be at least one dad in the stands screaming at you the entire time. So why have some tax collectors given up aiming for the hoop and settled for rebounds?

At first glance, the tax code looks like 70,000+ pages of incomprehensible gobbledygook. (Sometimes you really can judge a book by its cover.) But scratch the surface hard enough and you’ll find a semblance of order. Add up total income from various sources. Subtract adjustments to gross income and standard or itemized deductions. Calculate the tax based on the remaining net income. Finally, subtract any available credits for doing things Washington is willing to subsidize, like having kids, sending them to college, or driving your kids to college in an electric car.

Easy peasy, right? (Yeah, sure.) In practice, of course, it’s a lot harder, and leads to complications like “partnership capital account revaluations,” “tentative alternative minimum taxable income,” and “auditors crawling up your you-know-what for a week and asking for every Staples receipt from the last three years.”

The lane to the net can be even twistier on the corporate side. Multinational corporations have crafted strategies like the “double Irish with a Dutch sandwich” (yes, that’s really a thing) to shift income from high-tax countries like the U.S. (35%), to low-tax countries like Ireland (12.5%). Clever lawyers save their clients millions of dollars with these sorts of gyrations, which explains why they wear antique Swiss watches and drive pricey German sports cars.

But what if we didn’t have to jump through all those hoops? What if we could just bounce the ball off the backboard and call it good? It turns out that some governments are finding ways to do just that.

In London, Treasury chief Phillip Hammond is proposing a “digital services tax” of 2% of gross revenue on U.S. companies like Google, Amazon, and Facebook. The new levy would raise £400 million per year, regardless of where those companies ultimately send their net to be taxed. The European Union and Spain have proposed similar taxes of 3%, and several more countries are eyeing that bandwagon. Those small percentages may not sound like much. But applying them over a broader base can quickly mean enormous revenue for those countries.

Here in the U.S., several states impose revenue-based taxes instead of traditional corporate income taxes. In Texas, businesses pay 1% of gross receipts over $1 million, or 0.575% over $10 million. In California, LLCs pay a fee of up to $11,790 depending on gross revenue. And in Ohio, businesses pay a flat Commercial Activity Tax of 0.26% on Ohio gross receipts over $1 million. Those amounts may look like small potatoes, but they add up fast. Plus, it’s easier for businesses to calculate revenue-based taxes and for auditors to verify them.

The good news is that our old-school income tax raised about half of our federal revenue last year. It would take a Herculanean effort to change that system, especially when Mitch McConnell and Chuck Schumer can’t even agree on naming a post office. And that means all your favorite tax breaks are still safe, at least for now. So call us to make sure you’re not missing out on any free throws!